1. Field of the Invention
The present invention relates to a method and system for quantifying risk of fraud associated with a purchasing card transaction based on charge-back history associated with a consumer involved in the transaction.
2. Background Art
Purchasing cards such as credit cards, department store cards, calling cards, and the like have gained widespread use. Such purchasing cards have many advantages. For example, they allow a consumer or cardholder to make expensive purchases without having large sums of money on hand. Unfortunately, purchasing cards have increasingly become a vehicle to commit fraud. It is estimated that the total cost of purchasing card fraud is $1.3 million for every 1 million active accounts.
At least two conditions must be met before a purchasing card transaction can be completed. First, the cardholder must possess a valid purchasing card. Second, the merchant must be authorized to accept the purchasing card as payment for goods and/or services, and to receive payment from the organization that issued the purchasing card.
Typically, purchasing card transactions involve third party purchasing card transaction processors in addition to the merchant and the purchasing card issuer. Transaction processors are typically independent business institutions that provide merchants with data processing services to facilitate the flow of purchasing card transaction data, and the corresponding payment of money, between the merchants and card issuers. The flow of transaction data from the merchant to a card issuer via a transaction processor is commonly referred to as processing or clearing a transaction. The flow of money from the issuer to the merchant via a processor is known as settlement.
For a typical purchasing card transaction, a cardholder presents a purchasing card to a merchant who records the transaction by using an electronic terminal or a manually imprinted sales draft. Alternatively, if the cardholder is making a purchase via the Internet, then the transaction may be recorded via a website. Generally, the recorded data includes purchase amount, the cardholder""s account number, expiration date of the purchasing card, and a merchant verification number.
Typically, at the end of a particular day, the merchant determines the total dollar volume of the purchasing card transactions completed and prepares a deposit slip indicating the amount. All the transaction data is then transmitted to the merchant""s transaction processor, and entered into a computer of the transaction processor. This transfer may be electronic, in which case a data capture terminal may be used to transfer the data directly to the computer of the transaction processor. Alternatively, the transfer may involve the deposit of imprinted paper, such as sales drafts, and subsequent entry of the data into the computer of the transaction processor by data entry personnel.
Although purchasing cards provide significant convenience for both cardholders and merchants, there are also well known risks associated with purchasing card transactions. The principal risk is loss resulting from fraudulent or unauthorized use of a purchasing card. Such losses must be absorbed by the merchant, the transaction processor and/or the card issuer.
Over the years, card issuers and merchants have relied on several different methods to protect themselves from fraud or misuse, and to verify the validity of a purchasing card before completing a transaction. For example, card issuers may provide xe2x80x9cwarning bulletinsxe2x80x9d to merchants. Warning bulletins are booklets that list the account numbers of purchasing cards that should no longer be accepted. Account numbers may be included on these lists if the purchasing card has been reported lost or stolen, if the cardholder has exceeded his or her credit limit or has become delinquent in payments to the issuer, if the account has experienced excessive charge-backs, or if the purchasing card should not be accepted for another reason (such as mistakenly issued cards and cards that are invalid outside their country of origin).
More recently, card issuers and card issuing associations have provided real-time access to computer databases. This allows merchants to receive telephonic authorization for a transaction based on a search of a continually updated database, which may include similar information as described above with respect to warning bulletins. For a typical transaction authorization, the merchant obtains an authorization code or authorization indicia from an authorization institution or source via telephone or computer terminal. Authorization sources include card issuing associations, card issuers, as well as transaction processors that also provide clearing and settlement services between merchants and card issuers.
Several different methods are currently used for obtaining authorizations. In one method, a merchant uses a telephone to call an authorization source and provide transaction data. An operator associated with the authorization source enters the transaction data into a computer, and provides an authorization number or code to the merchant if the transaction is authorized. Some authorization sources also have audio response units that respond to dual tone multiple frequency signals entered from the merchant""s telephone. In this way, the merchant may directly enter numeric transaction data into a computer, and receive an authorization number if the transaction is authorized.
Some transaction processors and card issuers provide an electronic terminal that reads the account number and expiration date from a magnetic strip on the purchasing card. Once the merchant enters the purchased amount into the terminal, the terminal automatically dials an authorization source host computer and initiates an authorization request. The terminal displays and/or stores an authorization code if the transaction is authorized. In each case, the approval code is recorded along with other transaction data.
Authorization sources may also provide risk modeling for quantifying risk of fraud associated with purchasing card transactions. Generally, such risk modeling includes evaluating a plurality of factors, and assigning a risk score for a particular transaction that is indicative of the probability that the transaction is fraudulent. The factors that are evaluated may be related to characteristics of the cardholder or purchasing card involved in the transaction, such as last usage, data of issue and card status. Each factor is typically assigned a risk score, and the individual risk scores are combined to obtain an overall risk score. The overall risk score is then forwarded to a requesting merchant, who may then determine whether to complete the transaction.
The present invention provides a method and system for quantifying risk of fraud based on charge-back history. Consequently, the method and system provide mor accurate results than prior art risk-modeling methods and systems.
Under the invention, a method for quantifying risk of fraud associated with a purchasing card transaction includes obtaining a charge-back history associated with a consumer involved in the purchasing card transaction; and determining a risk score based on the charge-back history.
The step of obtaining a charge-back history may include obtaining a reason code for each charge-back included in the charge-back history. Furthermore, the method may include weighting each charge-back included in the charge-back history based on the corresponding reason code. As a result, charge-backs that are more indicative of fraud may be given greater weight than other charge-backs less indicative of fraud, such as a charge-back initiated by a card issuer because the associated merchant failed to timely clear the transaction.
The method may also include obtaining additional charge-back history associated with a machine identification number of a machine involved in the purchasing card transaction. For example, if a personal computer is being used in the purchasing card transaction, charge-back history associated with an identification number of the computer may be obtained and considered.
The step of determining a risk score may be performed in any suitable manner. For example, the risk score may be determined using a linear risk model, a regression risk model, a decision tree risk model, and/or a neural network risk model. Furthermore, other purchasing card transaction characteristics may also be considered, such as card age, card status, card last use, etc.
Further under the invention, a system for quantifying risk of fraud associated with a purchasing card transaction includes an authorization source for obtaining a charge-back history associated with a consumer involved in the purchasing card transaction, the authorization source including a risk model for determining a risk score based on the charge-back history.
In one embodiment of the system, the authorization source includes a database for storing a reason code for each charge-back included in the charge-back history, and a processor in communication with the database and including the risk model. Furthermore, the risk model includes instructions for determining the risk score based on the reason codes.
The above features, benefits and advantages and other features, benefits and advantages of the present invention are readily apparent from the following detailed description of the best mode for carrying out the invention when taken together with the accompanying drawings.